Gifts special: Giving in the long term

Those of us in middle age are frequently reminded that youth is wasted on the young. This is rarely more true than in investment. Much of life seems to operate under the Law of Time and Money, which says that generally, the more of one you spend, the less of the other you will need.

Most children have little money but much time. The consequences are profound. Research shows that even modest sums put aside over the very long term can increase spectacularly, thanks mainly to the compound growth created when income from the investment is ploughed back in. A single share of Coca-Cola, bought for $40 when the company went public in 1919, was worth $8.5m by the end of last year with all dividends reinvested.

So the greatest investment gift that any of us can give children is a bit of money with which to capitalise on their abundance of time. The key is to choose tax-advantaged products such as the new Junior Stocks and Shares Isas, into which parents and others can pay up to £3,600 a year and which protects all the proceeds from income and capital gains tax. If you put in the maximum every year, invest in low-cost products such as index trackers and manage 5 per cent annual growth, after 18 years your child will have a fund worth around £106,000. That should help with university fees.

Stop paying in and simply leave the money to grow (again assuming 5 per cent a year) for another 18 years, and by the time your child is 36, the fund is worth £255,000. That might add up to a deposit on a home.

Or what about a pension for the new baby? Here, you can pay in up to £2,880 a year, which with tax relief at 20 per cent comes out at £3,600. If you follow the same pattern and stop paying in when the child is 18, 5 per cent growth per year from there on will turn that sum into just over £1m by the time your offspring is 65. That should help keep the wolf from the door, even if offspring never save another penny in pension contributions throughout their working life.

By contrast, if your children start paying into a pension at 28, a typical age in Britain, they would need to save around £9,600 a year to have the same sum when they’re 65, again assuming growth at 5 per cent a year.

Investments like these take maximum advantage of the resources realistically available to most people: moderate sums of money and a lot of time. But they have other, perhaps even greater, benefits.

Increasing longevity and parlous government finances mean that our children will not be able to rely so heavily on the state. Families will become more self-reliant, with more money being channelled between generations. That means grandparents paying into their grandchildren’s pensions from the time these grandchildren are born, in order to ensure that one generation does not become a financial burden on the next in old age. This is a powerful virtuous circle that many of us could create.